Markets Aren't as Benign as They Look 39 comments
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“Remember, that credit is money.”
- Benjamin Franklin.
About 15 years ago, an older relative who enjoyed considerable status and influence within her local community expressed some surprise about how her bank account operated. She had always assumed that the banknotes that she deposited within her account would literally be kept in some kind of vault for safe keeping and left untouched. She fully expected to see the very same notes whenever she made a withdrawal. The idea that her money would be reused and lent on by the bank – and that the bank notes that returned would not likely be “hers” – came as something of a revelation to her. (Quite how bank depositors manage to earn interest was evidently not something that she unduly worried about. But given that current savers now earn essentially nothing, perhaps her lack of concern on the topic is more widely shared.)
Banks and banking are certainly poorly understood. Given the severity of the crisis, we can say with some confidence that banking is poorly understood even by bankers. The widespread unfamiliarity with the workings of the banking system may even be a good thing, for a while. For as Henry Ford once said,
It is well enough that people or the nation do not understand our banking and monetary system for if they did, I believe that there would be a revolution before morning.
Someone else who believes that the prospect of a revolt against the bankers is entirely conceivable is Michael Lewis, author of Liar's Poker (the definitive account of investment banker atavism – in this case, at Salomon Brothers in the mid-1980s) and former bond salesman, who knows something of the nature of the Wall Street beast. You can read the transcript of this podcast here. Among the pertinent highlights: in 1970, roughly 5% of male Harvard graduates went into finance. By 1990 the figure had risen to 15%; by 2007, 20% of the men and 10% of the women planned to head to Wall Street. Lewis suggests that half of the remainder also applied and just didn't get jobs:
...a radical misallocation of human talent. You can say it's faith in the free markets, but it's caused by the huge growth of a culture of financial manipulation... With the sub-prime mortgage racket generating lots of fees, the people within each big Wall Street firm who create that business acquire enormous power. So when the business gets decreasingly sane [gorgeous phrase], when the loans get shakier and shakier, and the leverage gets bigger and bigger, they're the ones who say we've got to keep doing this. Even though people not directly implicated in the business might have said, “No, it's time to stop.”... For thirty years the people who have had the most money to throw around were engaged in financial manipulation. Now they have outsized influence over the way the company [and country] is run.. I think it's politically risky. There’s a real chance that there’s going to be an uprising about this, and they're going to have trouble controlling the process. (Emphasis mine.)
Future generations will rightly wonder how taxpayers stood by while their present and future earnings were essentially redirected into the pockets of bankers who messed up, not trivially, but in a way that threatened the integrity and working of the entire financial system. Chief executives at banks have defended the ludicrous continuation of the bonus culture on the basis that talent needs to be rewarded at free market rates. This is, of course, absurd. If there were any talent out there in banking to create social value as opposed to leaching off the taxpayer and shareholder, it would be leaving the banks and setting up new entrepreneurial ventures to provide capital to those individuals and businesses most worthy of receiving it. As it is, banks are being stuffed with money from the government purse and sitting on it – or, as Luke Johnson suggested a couple of weeks ago, putting it to work perpetuating the misallocation of capital to the property sector.
The ongoing unavailability of bank finance, despite governments cramming capital down the throat of the banking sector goose, can be seen in the figures for corporate bond issuance, which on a global basis broke through the $1 trillion mark this year with four months still to go. This reflects the credit drought for the corporate sector and the difficulty companies face in securing bank loans. It also points to the income drought facing investors, who are otherwise caught between the rock of artificially low government bond yields and the hard place of quasi-zero deposit rates from those same pesky banks. Ironically, on exactly the same day that the corporate bond issuance figures were released, Standard & Poor's announced that the number of companies defaulting on their debts had risen to record levels this year – even as returns for the most speculative corporate bonds had soared since January.
Such is life when governments and their ostensibly independent central banks are allowed to muck about with interest rates, thus distorting market values all the way through the capital market chain. Quantitative easing manipulates government bond yields lower on the dubious premise of stimulating the broader economy. Coordinated monetary policy drives down base rates toward zero, and forces bank depositors into higher risk assets simply to keep their head above water. Some of this micro meddling would be justified if the banks were passing on the liquidity so generously supplied to them, but they are not. Those investors not lured by the siren-like returns of speculative quality assets are left to ponder whether or when the tidal wave of easy money sloshing round banks and asset markets will trigger real inflationary pressure. (That inflation is at work in financial asset prices is hard to deny – an over-supply of money chasing ultimately finite resources.)
Meanwhile, risk assets continue to surge higher. How durable the rally is remains, of course, to be seen. But those chasing equity markets ever higher should consider the following question: how can the world return to pre-2007 levels of economic growth when the supply of credit is being hopelessly constrained? And those brave investors buying bank stocks might wish to consider the report "Small Lessons from a Big Crisis" by Andrew Haldane, Executive Director for Financial Stability at the Bank of England, presented to the Federal Reserve Bank of Chicago Annual Conference in May this year. Haldane suggests the following hypothetical trade. Imagine placing a hedged bet in 1900: a £100 long investment on UK financial sector equities versus a £100 short bet against general UK equities (i.e., a bet on UK banks outperforming the rest of the market). How would that bet have performed?
The chart below shows the results.
For the first 85 years, the bet looks like a rather unexciting trade. By 1985 it would have delivered £500, the equivalent of 2% per annum. And then comes the period 1986 to 2006. By the end of 2006 (note: before the credit crisis gets truly into gear), our once unexciting bet would have delivered £10,000, or the equivalent of over 16% per annum. As Haldane observes,
There is no period in recent UK financial history which bears comparison.
And then, of course, it all went horribly wrong. The cumulative fall in UK banking stocks up to the low point (so far) in March is the largest in history at over 80%, “outstripping the fall following the first oil price shock in 1973/4 and the stock market crash of 1929”. By the end of 2008, our century-old gamble would have delivered a capital sum of £2,200, or the annualised equivalent of less than 3% - reversion, in other words, back to the mean.
Just how did UK banks manage to generate such spectacular recent returns? Haldane points below to the obvious answer: leverage. “Movements in leverage have clearly been the dominant driver. Since 2000, rising leverage fully accounts for movements in UK banks' return on equity – both the rise to around 24% in 2007 and the subsequent fall into negative territory in 2008”.
Haldane also points out that those banks unable to deliver sufficiently high returns on assets to meet their return on equity targets resorted instead to gearing up their balance sheets. The rest is history (as, probably, are many of the banks, at least as far as mark-to-market accounting is concerned).
Where does this leave us now? 2009 has seen an extraordinary rally by more speculative assets, leaving “value” behind in the dirt. As Rob Arnott suggested two weeks ago, the gulf between “value” and “growth” stocks, for example, has only been more marked once in history – at the height of the dotcom boom. The rally may persist – and the outperformance of junky assets over high quality ones might persist alongside it. But the rally is taking valuations back toward those that pertained when the world was rolling orgiastically in credit. The credit is gone. We will not see its like again for years to come.
You do not have to understand the precise workings of banks to know that buying their equity now – or for that matter the equity of speculative quality companies – represents unusual risk. The world has changed and the financial world in particular now looks radically different from the ill considered credit spree that dominated until western property markets and the associated banks started to creak and then collapse in the summer of 2007. The seemingly benign market environment is dangerously misleading. Those investors chasing the momentum of the most speculative cyclical stocks – and debt of comparable quality – are incurring exceptional levels of risk. Perhaps, like bankers shovelling other people's capital toward essentially unproductive uses, they simply don't care.
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This article has 39 comments:
the rally has yet to take the S&P above the "panic" selling days of early October dude. One issue is the only valuations you guys like to use are P/E which is stupid because it uses only a "spot" in time earnings and not NORMALIZED earnings. If one looks all these crazy P/Es are underpinned by stocks still trading near, at, or under book value. If you look at SHLD for example, people scream bloody murder about its P/E ratio but fail to see it trades well under adjusted tangible book. Another way to look at this: Homebuilders share prices PEAKED on say 5x "E". That E was a cyclical peak. One had to understand that down the line that "E" would not be recurring. When the world prints money, asset prices will rise. In the meantime people will be eating and buying stuff; not only in the US but overseas where standard of living is rising. I really think everyone has lost the plot.
A revolt against the bankers would be ironic (but welcomed) because the typical American consumer is/has been no better managing his debt.
Good article. Good reality check.
On Aug 21 03:33 PM Deepv wrote:
> " the rally is taking valuations back toward those that pertained
> when the world was rolling orgiastically in credit"
>
> the rally has yet to take the S&P above the "panic" selling days
> of early October dude. One issue is the only valuations you guys
> like to use are P/E which is stupid because it uses only a "spot"
> in time earnings and not NORMALIZED earnings. If one looks all these
> crazy P/Es are underpinned by stocks still trading near, at, or under
> book value. If you look at SHLD for example, people scream bloody
> murder about its P/E ratio but fail to see it trades well under adjusted
> tangible book. Another way to look at this: Homebuilders share
> prices PEAKED on say 5x "E". That E was a cyclical peak. One had
> to understand that down the line that "E" would not be recurring.
> When the world prints money, asset prices will rise. In the meantime
> people will be eating and buying stuff; not only in the US but overseas
> where standard of living is rising. I really think everyone has
> lost the plot.
2009 has seen an extraordinary rally by more speculative assets, leaving “value” behind in the dirt. As Rob Arnott suggested two weeks ago, the gulf between “value” and “growth” stocks, for example, has only been more marked once in history – at the height of the dotcom boom.
----------------------...
I'm a little puzzled by this assertion. The data I've seen state quite clearly that growth stock valuations are historically cheap relative to value stock valuations.
From a recent Fidelity white paper (full link at bottom):
As of the end of July, growth stocks were about as inexpensive on a price-to-trailing earnings (P/E) ratio basis relative to value stocks as they’ve ever been (see Exhibit 2). This unusual valuation discrepancy (value stocks typically have lower P/Es than growth stocks) is due largely to recent quarterly earnings growth declines in the financial sector—which make this sector look more expensive on a P/E basis. Based on analysts’ forecasts of future earnings over the next 12 months, the earnings of financials and value stocks are expected to rebound in coming quarters, which would make value stocks once again cheaper than growth stocks. However, even on a forecasted P/E basis, growth stocks are currently valued at the lowest levels on record relative to value stocks. Other valuation metrics, such as price-to-sales and price-to-book ratios, show that growth stocks remain below, but somewhat closer to their long-term average valuations relative to value stocks.3
Source: https://news.fidelity....
On Aug 21 05:04 PM Crocodilian wrote:
> Author writes:
> 2009 has seen an extraordinary rally by more speculative assets,
> leaving “value” behind in the dirt. As Rob Arnott suggested two weeks
> ago, the gulf between “value” and “growth” stocks, for example, has
> only been more marked once in history – at the height of the dotcom
> boom.
> ----------------------...
>
> I'm a little puzzled by this assertion. The data I've seen state
> quite clearly that growth stock valuations are historically cheap
> relative to value stock valuations.
>
>
> From a recent Fidelity white paper (full link at bottom):
> As of the end of July, growth stocks were about as inexpensive on
> a price-to-trailing earnings (P/E) ratio basis relative to value
> stocks as they’ve ever been (see Exhibit 2). This unusual valuation
> discrepancy (value stocks typically have lower P/Es than growth stocks)
> is due largely to recent quarterly earnings growth declines in the
> financial sector—which make this sector look more expensive on a
> P/E basis. Based on analysts’ forecasts of future earnings over the
> next 12 months, the earnings of financials and value stocks are expected
> to rebound in coming quarters, which would make value stocks once
> again cheaper than growth stocks. However, even on a forecasted P/E
> basis, growth stocks are currently valued at the lowest levels on
> record relative to value stocks. Other valuation metrics, such as
> price-to-sales and price-to-book ratios, show that growth stocks
> remain below, but somewhat closer to their long-term average valuations
> relative to value stocks.3
>
> Source: https://news.fidelity....
On Aug 21 05:27 PM Gardener wrote:
> From Fidelity huh?
Yes --the numbers are the same no matter who does the counting: growth stocks are at historically _cheap_ levels vs value stocks, contrary to what the author writes. You might like or dislike Fidelity research, but this is just a straight numbers question.
I tried to link the original essay above, but SA chopped the URL. Here's another try at a link:
tinyurl.com/nygc5q
More irrational exuberance today, and outright insanity.
The more this market climbs on bad news or "less bad" news the more spectacular the downfall will be.
Like another commentator said: "Greed and hubris." Hubris is the ancient term for "pride" and most of us are familiar with the phrase "Pride comes before the fall."
Your article is dead on.
You may be investigated as a domestic terrorist though for not cheerleading the Financials that have robbed the average citizen of trillions in hard earned savingsa and retirement.
"As for bank examiners, the herd is very peculiar indeed having been born blind and gullible they naturally joined the FDIC where they fumbled the opportunity to learn and went straight to work looking at nothing that mattered because they did not know what it looked like." Love the peaks under the skirts of the crazies
On Aug 21 07:17 PM Deepv wrote:
> The deal is this: just because stuff rallies does not make it overvalued.
> Just because stuff has a low P/e Ratio (homebuilders in 2005) does
> not make it cheap. Just because a stock goes up does not mean it
> is expensive. Also, macro seems to be very US focused. I think now
> more than ever a bottom up approach is appropriate. The implied statement
> in this article is that stocks are expensive. Which ones? Microsoft
> and Cisco on generational low P/E? Apple with highest growth it
> has ever seen and innovative products (sure, maybe)? REITS trading
> at 10% of peak values and benefiting from credit enhancement? Timber
> companies trading at 40% of private transactions? Consumer staples
> on 13-17x still showing organic growth year in year out? Pharma
> after 10 years of decline? Energy after getting obliterated over
> past 12-months in the face of rising oil now seen as an inflation
> hedge or quasi financial asset? Nat gas drillers at under replacement
> cost? Retialers and discretionary still trading under book and cutting
> costs? Where are these expensive stocks? We've seen what earnigns
> look like under armegeddon (Q1 2009) condition.
January-08 1
February-08 0
March-08 1
April-08 0
May-08 2
June-08 0
July-08 3
August-08 3
Septemb-08 4
October-08 4
Novembe-08 5
Decembe-08 3
January-09 6
February-09 10
March-09 5
April-09 8
May-09 7
June-09 9
July-09 24
August-09 12
As August 21-09. this does not look like a recovery to me...
Green shoots!
Recession is over!
Oil is at 2007 price levels!
Beating all estimates!
Analysts say buy stocks!
shhh......
....don't tell anyone anything else.
Bankrupt banks? Credit card defaults? Prime mortgage defaults? Record unemployment? Unaccounted foreclosures?
...only the worries of regular folks. Nothing for bankers and politicians to worry about. Bailing out another buddy's bank is, well, only taxpayer money.
usdebtclock.org (but some analysts, bankers and politicians tell me this could be fake)
The unfortunate reality of the two counterforces of the stimulus package, "deleveraging" and "fewer consumers", is that they have long term staying power. It is inevitable that they will soon resurface as the dominant influence on the economy . If the Oklahoma City Thunder win their first 3 basketball games this year, I will only have to take one look at their talent level for my bearish conviction..... consider your economic policy team before believing the recent headlines.
Interesting that you pick out SHLD as an example of "mispricing" when evaluated by P/E, rather than adjusted book. I seem to recall a couple of years ago, pundits were calling it a real estate play....a case of "forget about how well the stores do, the value is in the real estate holdings". Given the debacle in commercial real estate, I'd suggest its probably overvalued by "adjusted book", as well.
On Aug 21 03:33 PM Deepv wrote:
> " the rally is taking valuations back toward those that pertained
> when the world was rolling orgiastically in credit"
>
> the rally has yet to take the S&P above the "panic" selling days
> of early October dude. One issue is the only valuations you guys
> like to use are P/E which is stupid because it uses only a "spot"
> in time earnings and not NORMALIZED earnings. If one looks all these
> crazy P/Es are underpinned by stocks still trading near, at, or under
> book value. If you look at SHLD for example, people scream bloody
> murder about its P/E ratio but fail to see it trades well under adjusted
> tangible book. Another way to look at this: Homebuilders share prices
> PEAKED on say 5x "E". That E was a cyclical peak. One had to understand
> that down the line that "E" would not be recurring. When the world
> prints money, asset prices will rise. In the meantime people will
> be eating and buying stuff; not only in the US but overseas where
> standard of living is rising. I really think everyone has lost the
> plot.
The money they manage belongs to people like your older relative who do not really understand what they do with the money or whether he/she has a better alternative.
Perhaps that is the real problem. People don't care and so, as with Madoff, they need to lose their savings to learn.
On Aug 22 01:08 AM rawhamburger wrote:
> USA Bank failures continue to rise.
> January-08 1
> February-08 0
> March-08 1
> April-08 0
> May-08 2
> June-08 0
> July-08 3
> August-08 3
> Septemb-08 4
> October-08 4
> Novembe-08 5
> Decembe-08 3
> January-09 6
> February-09 10
> March-09 5
> April-09 8
> May-09 7
> June-09 9
> July-09 24
> August-09 12
>
> As August 21-09. this does not look like a recovery to me...
Lets face it; we missed our best chance to apply an appropriate cure to the problem. When the crisis first surfaced the Bush administration should have declared the financial institutions have to unwind the problems on their own and also declare a three year income tax holiday to all citizens.
This would have punished the perps and immediately declared war on over-leveraged financial conditions. Admittedly it would have caused a potential deeper immediate pain, but it would have:
1) Punished most the guilty.
2) Shown over-leveraging for the extreme risk it is.
3) Empowered the individual (the tax holiday), not Wall Street, the Big Bankers, and the Government ( this is precisely why it was never even considered).
4) It would have focused the pain on the generation that caused it- not push it out to the innocent ones.
5) It also would have been a good opportunity to go to a value added sales tax in lieu of the extremely counterproductive and intrusive income and property taxes we presently have.
I think we have papered over the problem and it is still lurking and growing. No matter how much relief we feel and see in the short run the Piper is printing up the bill and he will be mailing it sooner or later.
Also, a bit of disclosure... I am guilty, as well as like minded investors of the sin of leveraging. The reason we have turned to the markets of a way of enhancing our financial investments and retirements is because of the LEVERAGE the markets offer us. If you deny this go take your money and go buy a farm, or factory and work it with the sweat of your brow. Continually re-invest any profits back into that business and live your life and realize the lifestyle that you personally create with your own hands. Even having employees is a form of leverage.
On Aug 21 11:05 PM Deepv wrote:
> I think Q1 was trough earnings. To argue otherwise is to argue for
> the great depression II. I think anyone with brain can see we printing
> and borrowing our way to avoid that pretty nicely. I think we may
> have great inflation II. for that I would rather have stocks than
> hold dead president or fixed income dead pres's. Stocks are interest
> in real biz that can respond to inflation. gold is a rock.
On Aug 22 03:18 PM MudEngineer wrote:
> The E in P/E can and will get worse, so the current stock P/E's are
> not necessarily cheap. Natural Gas looked cheap to me at $6, not
> it is half of that level. The optimism created by this quick bear
> market up move is quite impressive. Memories of recent losses are
> obviously very short. The consumer is dug in and will not borrow
> and will not spend on much of anything but food and lodging. We just
> incentivised many low income people to buy new vehicles using taxpayer
> borrowed money. We did the same several years ago with houses and
> look how that turned out! I am thinking that in less than four months,
> at least half of the Cash for Clunkers loans will be in default.
> Those people were driving a beater for good reasons. There is no
> new driver coming dine the pike for the economy and deflation will
> accelerate from here. Good luck if you stay long this market.
"American spirit emerging
By John Browne
Despite growing concerns about the growth in Federal Reserve spending, voiced this week by none other than famed investor Warren Buffett, Washington seems determined to keep its foot on the money-pumping accelerator for as long as it can. But even though Washington continues to ignore the realities, alarm bells are beginning to ring at town halls across the country.
Last week, the Fed left its key short-term rates frozen at 0 to 0.25%, enabling banks to borrow at near zero and reap spreads as high as 6% to 24%. The Fed also continued its policy of paying interest on banks' reserves, further boosting Wall Street's bottom line. The government has decided to save the banks, no matter how much the public has to suffer.
Worse still, the administration has been largely silent over the obscene bonuses paid by banks to the very executives whose casino mentality caused a financial crisis that the International Monetary Fund now estimates has cost the world some US$7 trillion. At financial firms that have received bailout money, it has been estimated that thus far in 2009 bonuses paid to executives have exceeded profits.
However, with the pedal still hitting the metal, the Fed has begun to discuss plans of a so called "exit strategy" that would pave the way toward higher interest rates.
These statements of economic neutrality were based upon the Fed's impression that the recession is ending. But the Fed has not yet taken any meaningful actions to curb its potentially inflationary policies.
For now, mere words are enough to encourage American stock markets, but only briefly. More recently, US equity investors gradually are facing up to the fact that, while stock prices rose recently by some 45%, earnings, although "ahead of estimates", have fallen by almost 30%, despite savage cost cutting and deep inventory depletion. The more important top-line revenues have fallen by about 15% and free cash flows are tumbling in response.
The public, who feel the vicious bite of "real" 20% unemployment (rather than the official rate of 9.8%), are becoming increasing distrustful of big government and deeply resentful of its increasing grasp of their lives. The cracks are beginning to show.
A key element of the Barack Obama administration is its 1,000-page healthcare reform bill. Despite the impossibility of reading, let alone understanding, the legislative behemoth, Obama tried forcefully to push it through Congress in just two weeks.
And, despite the clear failure of government healthcare in many parts of the world, including domestically in Massachusetts, the administration is still looking to move ahead with a public option plan.
The public is not yet willing to play ball. While much of the biased media paint the rowdy town hall meetings across the country as merely the clumsy machinations of the Republican Party, the events are revealing the deep misgivings average Americans have about the growth of government. If this movement spreads, it could have a dramatic and healthy effect on the American economy in the long-term.
At their core, Americans hold individual freedom and self-reliance dear. Therefore, by nature, they are not socialists and resent big government. To them, the actions of the administration, supported by a compliant Congress, are clear: use massive amounts of public funds to support the financial elite, maintain massive entitlement spending to secure votes, and extend the grasp of big government through healthcare and other measures. Their anger is justified.
President Obama campaigned on political "change" and an end to the abuse of taxpayers. So far, he has massively increased government entitlement spending and has failed to loosen Congress's firm grasp of the pork barrel.
It may be that the deep resentment expressed in town halls will embolden ordinary people to pressure Congress to stop the train. If that happens, America will begin the long and painful road towards economic restructuring, individual freedom and enterprise. Under those conditions America would represent a great investment opportunity.
John Browne is senior market strategist, Euro Pacific Capital. Euro Pacific Capital commentary and market news is available at www.europac.net It has a free on-line investment newsletter"
I'm not certain I'd use NG stocks as an example, either. As you correctly point out, many, if not most companies are/did hedge their production, BUT, as another article in today's SA, (I think...it might have been Jim Jubak's piece in MSN Money yesterday) points out, those hedges will/have expired, and it'll cost substantially more to re-hedge. Which makes the exercise similar to what was seen at other firms that reported earnings "beats" via cost cutting. Its a "one time" cure that will last a quarter, maybe 2, at best, unless there's improvement in demand.
On Aug 21 04:13 PM chap08 wrote:
> In a way, I can understand the greed, the short termism, the mistakes
> etc. What I really can't understand, is why we now don't see radical
> reform. Are we partly to blame for not shouting loudly enough?
Too true Tim, unfortunately.
They just dont get it.
On Aug 21 05:58 PM Crocodilian wrote:
> @Gardner
> On Aug 21 05:27 PM Gardener wrote:
We are mainly printing and borrowing for the Money Center Banks and they are sitting on their Welfare Checks. They are not ramping up the velocity of money. The Money Center Banks are who owns the Fed, they are who they are protecting. With inflation comes higher taxes in the form of higher cost of doing business. High Oil Prices are a tax on almost all economic activity.
So the Cure for excessive debt & leverage is more debt and leverage? Hmmmm Guess I should go get some more credit cards.
On Aug 21 11:05 PM Deepv wrote:
> I think Q1 was trough earnings. To argue otherwise is to argue for
> the great depression II. I think anyone with brain can see we printing
> and borrowing our way to avoid that pretty nicely. I think we may
> have great inflation II. for that I would rather have stocks than
> hold dead president or fixed income dead pres's. Stocks are interest
> in real biz that can respond to inflation. gold is a rock.
But Ben Bernanke & co, (like Milton Friedman) has studied what happen in the 1930's and I think rightly saw the dangers of debt deflationary trap that did the real damage after 1929 by shrinking US money supply by a third. When Quantitative easing was announced I regarded those that thought it was is going to cause inflation in the near term as optimists, when you look a the tsunami of de-leveraging that we were facing.
Having said that it concern me that low interest rates are causing over valued house prices to rise again. One affordability measure claims it was back to 1996 in the UK, this is bonkers, as the average house price is still 6x the average earnings, against a long term average of less than 4. UK house prices and I suspect in many other countries as well, need to fall about 30% relative to wages. This can be done by inflation as in the 70's or nominal falls in prices as in the 90's. I would personally prefer the latter to the former and until April that did seem to be what was happening, it looked like one more year of of falling house prices would do it and the housing market could return to normal in 2010. I can now see the process dragging on painfully for a decade.
May be now we need higher base rates + quantitative easing that may allow the property bubble to deflate (not sure about this) but avoid wider price and asset deflation. The problem is the housing market has become so central to Western economies that falling prices would be consider recessionary for the wider economy rather than the much need rebalancing of the economy. Land taxes as proposed by Fred Harrison (and Winston Churchill in 1903 budget) would fix the problem. Yes OK that is an insane thought, to take on all those vested interests and reduce land and property speculation. I mean the wealthy would have to actually work for a living and create real wealth, rather than making money at our expense through speculation. Property speculation is a tax on the rest of us, redistributing wealth from workers and entrepreneurs to those that create no real wealth and now have the cheek to get tax payers to bailout them out when it blows up in their faces.
On 6-3-08 I called "go to cash, here comes the crash" (and got laughed at), and called the tops on oil "$20 before $200" and gold on 7-24-08 (see my SA comments from that date) and was told that $20 oil would require a big depression: "duh!")
Q1 2009 was the first little dip on the rollercoaster that gets the cars to the motorized "thing" (help me here) that takes them way up to the top of the rollercoaster track to position the riders for the BIG DROP. The Cybernetic Revolution phase of the still-ongoing Industrial Revolution is rapidly eliminating the need for most human labor and our "economic resource distribution system" is consequently obsolete and requiring drastic change. The credit/housing crisis is just a symptom of an underlying malady that "throwing money at banks" won't do squat to fix.
On Aug 21 11:05 PM Deepv wrote:
> I think Q1 was trough earnings. To argue otherwise is to argue for
> the great depression II. I think anyone with brain can see we printing
> and borrowing our way to avoid that pretty nicely. I think we may
> have great inflation II. for that I would rather have stocks than
> hold dead president or fixed income dead pres's. Stocks are interest
> in real biz that can respond to inflation. gold is a rock.